UST, munis, as safe haven assets, continue to be well bid
Investors are craving more municipal tax-exempt and taxable bonds, but issuance will continue to crawl at least for another week.
IHS Ipreo estimates next week’s volume at $5.24 billion, down from this past week’s revised total of $10.09 billion. The calendar for the upcoming week is made up of $3.44 billion of negotiated deals and $1.80 billion of competitive sales.
“We do expect issuance to pickup after the holiday-shortened week in large part due to the favorable market conditions,” said Brian Musielak, senior portfolio manager for Commerce Trust Co. “It’s hard for us to see yields moving much higher in the near term given the lingering concerns over the virus containment. In our view, safe haven assets such as U.S. Treasuries and even munis will continue to be well bid, which should bode well for muni issuance.”
There are 12 scheduled deals $100 million or larger, with five of them competitive. One quarter of the larger deals are of the taxable variety.
“We’ve been in the doldrums lately,” said Chris Brigati, head of municipal trading at Advisors Asset Management. “And I think we will see more of the same in the upcoming week since the holiday won’t be helping us in terms of supply.”
He noted that municipal credit spreads have been very tight as investors chase yield in a falling rate environment.
He said that professional money — portfolio managers and SMA accounts — were at the forefront as overall net buyers.
“They have to put cash to work,” he said, adding that they will continue to drive business going forward leaving the rest of retail not seeing consistent, or even mediocre, activity and leaving them to chase what’s left over.
“But I do have a concern,” Brigati said, “that at some point there could be a liquidity problem in the market. If and when inflows stop, that could turn net buyers into net sellers. ”
Barclays is expected to price the largest deal of the week — District of Columbia’s (Aa1/AAA/AA+/ ) $961.460 million of income tax secured revenue and revenue refunding bonds on Thursday.
“This will be the focus deal of the week particularly for the large institutional investors,” Musielak said. “We expect it to be a food fight.”
Jefferies is scheduled to price a total of $695.335 million for the Texas Transportation Commission (A3/A/A/NR) for the central Texas turnpike system on Thursday. It is expected to come in three tranches: $277.174 million of first-tier revenue refunding taxable bonds, scheduled to mature serially from 2023 through 2030 and include a term bond in 2040; $225 million of first-tier revenue refunding PUT taxable term bond in 2042; and $193.160 million of first-tier revenue refunding tax-exempt bond, scheduled to mature serially from 2040 through 2041.
Feb. 15 is a big redemption day, especially for Texas paper, so this deal seems to becoming at an ideal time for investors looking to put redemption money back to work.
“There always seems to be strong demand for Texas munis,” Musielak said. “While there is no state income, the sheer size and quality of underlying issuers draws a tremendous amount of investor interest. These deals should be well received.”
He added that this is usually the time of year when seasonality becomes more of a focus.
“Feb. 15 is the last big redemption day before the March/April lulls take over. Given our view that fund flows remain strong and no expectation for a huge surge in supply, ratios should remain stable,” Musielak said.
In the competitive space, Massachusetts ( / /AA+) is set to sell a total of $650 million of general obligation bonds in three separate sales on Wednesday.
Also, the New York Thruway Authority (A1/A/ / ) will sell a total of $450 million of general revenue bonds in two separate sales on Thursday.
There has been a big difference between negotiated and competitive deals in terms of balances left, and Musielak said that is in large part because of how deals are structured.
“We have seen a more balances on competitive deals this past week and a big reason behind that in our view relates to deal structure,” he said. “Most of the competitive deals we see have bidding parameters that often times limit premiums. Demand remains the strongest for 4% and 5% coupons which of course trade a significant premiums.”
Munis were mixed on Friday on the MBIS benchmark scale, with yields rising seven basis points inthe 10-year maturity and falling by five basis points in the 30-year maturity. High-grades were also mixed with yields on MBIS AAA scale increasing by five basis points in the 10-year maturity and decreasing one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield in the 10-year GO was one basis point lower to 1.18% and the 30-year GO was down two basis points to 1.82%.
The 10-year muni-to-Treasury ratio was calculated at 74.3% while the 30-year muni-to-Treasury ratio stood at 89.2%, according to MMD.
Stocks were lower as investors kept one eye on COVID-19 and the other one muted retail sales in January, declining industrial production and consumer confidence near a 15-year high in early February. An update on COVID-19 situation shows there have been 1,383 deaths and more than 63,000 sick people.
Treasury yields were mostly lower.
The Dow Jones Industrial Average was down about 0.37%, the S&P 500 index was lower by 0.06% and the Nasdaq fell about 0.08%.
The 3-month Treasury was yielding 1.556%, the Treasury two-year was yielding 1.420%, the five-year was yielding 1.411%, the 10-year was yielding 1.587% and the 30-year was yielding 2.043%.
Lipper reports 58th week of inflows
For the 58th straight week, investors poured cash into the municipal market continuing the streak as the money flowing into cash-exempt mutual funds has accelerated.
In the week ended Feb. 12, weekly reporting tax-exempt mutual funds added $2.128 billion of inflows, after inflows of $1.631 billion in the previous week, according to data released by Refinitiv Lipper late on Thursday. Over the past 12 weeks, inflows have only not exceed $1 billion only twice and they have exceed $2 billion three times.
“Fund flows continue to be impressive,” Musielak said. “It is hard to believe that year-to-date inflows are actually ahead of last year’s record pace. Until we see a substantial move higher in rates, its unlikely fund flows will reverse anytime soon. That in and of itself should keep demand strong.”
Exchange-traded muni funds reported inflows of $226.376 million, after inflows of $139.119 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.902 billion after inflows of $1.492 billion in the prior week.
The four-week moving average remained positive at $1.896 billion, after being in the green at $1.949 billion in the previous week.
Long-term muni bond funds had inflows of $1.394 billion in the latest week after inflows of $1.121 billion in the previous week. Intermediate-term funds had inflows of $384.906 million after inflows of $172.314 million in the prior week.
National funds had inflows of $1.880 billion after inflows of $1.459 billion while high-yield muni funds reported inflows of $636.037 million in the latest week, after inflows of $713.091 million the previous week.
Week’s actively traded issues
Some of the most actively traded munis by type in the week ended Feb. 14 from Puerto Rico and Texas issuers, according to IHS Markit.
In the GO bond sector, the Puerto Rico Commonwealth 8s of 2035 traded 182 times. In the revenue bond sector, the Grand Parkway Transportation Corp., Texas, 4s of 2049 traded 78 times. In the taxable bond sector, the Grand Parkway Transportation Corp., Texas, 3.326s of 2052 traded 127 times.
Week’s actively quoted issues
Puerto Rico and New Jersey and New York bonds were among the most actively quoted in the week ended Feb. 14, according to IHS Markit.
On the bid side, the Puerto Rico Commonwealth, GOs, 5s of 2041 were quoted by 34 unique dealers. On the ask side, the Board of Education of the Borough of Rutherford County New Jersey, GOs, 3s of 2041 were quoted by 182 dealers. Among two-sided quotes, the Port Authority of New York and New Jersey, taxable 4.458s of 2062 were quoted by 21 dealers.
Previous session's activity
The MSRB reported 32,989 trades Thursday on volume of $13.69 billion. The 30-day average trade summary showed on a par amount basis of $11.99 million that customers bought $6.07 million, customers sold $3.91 million and interdealer trades totaled $2.01 million.
Texas, New York and California were most traded, with the Lone Star State taking 14.143% of the market, the Empire State taking 13.775% and the Golden State taking 12.427%.
The most actively traded security was the Puerto Rico Commonwealth GO, 8s of 2035, which traded 45 times on volume of $119.230 million.
Chip Barnett contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.